The Fed appeased the stock market this week, but now will the market turn its attention to earnings and the economy?
Our index indicators are giving bullish readings, an upgrade over last week’s neutral readings. No doubt, the stock market reacted positively to the Fed‘s most recent message, which once again implied easy monetary conditions for the foreseeable future. This news propelled the major indexes back above their 50-day moving averages, which for the Dow is currently at 17,860, for the S&P 500, 2,070, and for the Nasdaq, 4,850.
However, as we mentioned last week, more important for the current bullish trend are the 200-day moving averages, and all three indexes remain comfortably above those.
Unlike the indexes, our internal indicators have not resolved the mixed messages they were giving a week ago. The 200-day Moving Averages Index is level 2 bearish, the Advance/Decline Index is level 1 bullish, and the and Cumulative Volume Index is level 3 bearish. But, similar to a week ago, these readings can easily change with a strong move by the indexes in either direction. Five of the nine major S&P sector funds are level 1 bullish, unchanged from a week ago. And volatility patterns continue to compress, a sign that fear is gradually leaving the market.
Treasury bonds (TLT) moved back into a primary bullish trend following the Fed announcement. If interest-rate concerns have indeed moved to the background, TLT could be in for a nice rally. A TLT pullback below $128.50 would change that outlook. The U.S. dollar (UUP) has had some volatile days following its recent surge higher, but its strong bullish trend continues to underpin the bullish trends in stocks and Treasury bonds.
Commodities continue to struggle, and, as we’ve mentioned on several occasions, that struggle is due primarily to weakness in the global economy. That weakness includes the United States. Our internal economic indicators show a U.S. economy on pace for its poorest showing since 2008. Granted, the year has a long way to go — but the early trends are not favorable. If these current trends continue, higher interest rates will disappear from the market’s list of concerns and will be replaced with concerns over profits and growth.
With the major stock indexes giving bullish readings but economic indicators struggling, options traders should continue to evenly weight between bullish and bearish positions. Fed-generated momentum could continue to push stocks higher, but slowing growth could cause the market to make an about-face very quickly. Here’s a trade for the bullish side of the equation.
Buy the Macy’s, Inc. (M) May 67.50 Calls (M150515C00067500) at $1.30 or lower. (The stock is currently trading at about $65.15.) After entry, take profits if Macy’s stock price hits $68.40 or the option price hits $2.90. Exit if the stock price closes below $63.30.
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